Why can’t our leaders learn from 30 years of failure in health and education?

We’ve known since the 1980s that the profit motive doesn’t work in health and education. And the reasons why are no puzzle at all

‘The experience of for-profit education in Australia and the US has been that it is far easier to extract public subsidies through scams of various kinds than to compete on the basis of high-quality education.’
Photograph: The Guardian

The inadequacy of competition and the profit motive in the provision human services like education and health has been established by harsh experience with consistent failures like PFI hospitals, for-profit schools and private prisons. This failure presents a puzzle: how is it that (assuming we have an adequate income) we can rely on for-profit corporations to put food on our tables and clothes on our backs, but not to educate our children or preserve our health.

In the hands of many advocates of privatisation, this puzzle is turned into a knock-down refutation: if the profit motive works well in providing something as vital as food, it must work well everywhere. The latest instance of this naive faith in the market is the Australian Productivity Commission’s call to privatise public health and housing.

In fact, there is no puzzle here: economists and public policy scholars worked out decades ago how to answer this question in principle, and solved many of the issues in detail. The problem is that the political class, along with much of the economics profession, have done worse than the Bourbons, of whom Talleyrand observed “they have learned nothing, and forgotten nothing”. Leading economist Paul Romer recently observed, echoing earlier comments by Robert Gordon, that macroeconomics has been going backwards since the early 1980s.

The same is true of the regressive microeconomics underlying the dogma that privatisation and market competition are always and everywhere beneficial. Our leaders, and the economists who advise them, have shown themselves incapable of learning from experience, but they have forgotten much that we once knew. In this case, what we once knew was the analysis of market failure that supported the successful mixed economy that came into being in the mid-20th century.

The basic analytical framework was set out in Francis Bator’s 1958 article, “The anatomy of market failure”, (itself drawing on earlier work by the great British economist AC Pigou). It was developed further by a string of contributions from economists like Kenneth Arrow, Joseph Stiglitz and George Akerlof, all of whom received the Nobel Memorial Prize in Economic Sciences for their work.

Taken together with Keynesian macroeconomic theory, this body of work explained why a properly functioning modern economy must be one in which some goods and services are provided by firms competing for profit and others by governments or publicly-funded non-profit organisations. The result is the “mixed economy”, political and social aspects of which were analysed by scholars such as Karl Mannheim and Andrew Shonfield.

Human services are among the sectors of the economy where markets and competition perform badly. The central problems related to human services involve information and finance. These are most obvious in relation to education. Education is for most of us, a once-only experience, and its value is hard to assess, except in retrospect. To some extent, we can make choices on the basis of the reputation of schools and universities. However, these reputations change only slowly over decades, so slowly that no rational for-profit firm would invest in maintaining them.

Moreover, education is hugely expensive, so that most families can’t afford it in the absence of public provision or a public subsidy. The experience of for-profit education in Australia and the US has been that it is far easier to extract public subsidies through scams of various kinds than to compete on the basis of high-quality education.

Many of the same issues arise in healthcare. Obviously, if we knew what was wrong with our health and how to fix it, we wouldn’t need doctors to tell us. As it is, we need to rely on the judgment of our doctors to give us the right treatment and, equally importantly, to tell us when we will get better without treatment. The greater the role of profit in the system, the greater the incentive to provide unnecessary or overpriced services. The example of the United States, which spends more on healthcare than any other country, with worse results, is an illustration.

Information isn’t a problem, or not much of one, in the case of food supply. We buy food on a weekly or even daily basis and have plenty of chances to determine what we like, and which suppliers offer good value for our money. There are things we can’t easily observe, like the cleanliness of food preparation, but these can be dealt with through regulation rather than through governments getting into the food supply business themselves.

Of course, none of this helps if you don’t have enough money to afford the food you need. But long experience has shown that the best way to help poor people afford necessities like food is to give them more money. Neither general food subsidies nor welfare payments tied to food purchases (food stamps) have ever worked as well as income redistribution.

Face the facts: competition and profit don't work in health, education or prisons | John Quiggin

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If markets and profits don’t work well in the provision of human services, why should we expect governments and non-profit organisations to do any better? The answer is that that non-profit provision relies on professionalism and a service ethos. These can’t be combined with reliance on direct financial incentives and managerial control.

The Bourbons who have dominated public policy for the past few decades are resolutely hostile to any kind of professional or service ethos. They take for granted the most simplistic versions of textbook economics, in which only monetary incentives matter. On a more sophisticated view of the question, people care just as much about the respect of their peers and belief in the value of their work as they do about the size of their pay packet.

This is ultimately an empirical question, and after 30 years of failure we have more than enough evidence to reach a conclusion. Across the human services sector, markets, incentives and competition rarely work better than non-profit provision and frequently lead to disastrous failure.